U.S. Natural Gas Exports May Not Drive Down Energy Costs After All

Liquefied natural gas exports from the U.S. won’t necessarily lower energy costs around the world, said executives involved in buying, selling and trading LNG speaking at IHS CERAWeek in Houston.

Luminant Lake Hubbard natural gas power plant in Dallas, Tex.

Bloomberg

The U.S. is expected to start exporting LNG in 2015. These new supplies could allow more buyers to purchase gas based on the American natural-gas benchmark, Henry Hub, instead of linking to oil prices.

Henry Hub prices have been historically low in recent years, thanks to record U.S. production. In Asia, where about 80% of LNG contracts are linked to the price of oil, prices are typically at least $10 per million British thermal units higher than in the U.S.

Many of these oil-linked contracts are coming up for renegotiation, said Rajeev Mathur, executive director of marketing at India’s state-owned natural-gas processing and distribution company, GAIL. Some will switch to Henry Hub pricing as U.S. exports increase. But many will stay linked to oil, both buyers and sellers said.

The Brent oil market is traded around the world, while natural-gas markets are regional, making them less liquid and more volatile.

Global demand in the next two decades will grow faster than U.S. LNG supplies, said Laurent Vivier, vice president of strategy for gas and power at French oil major Total SA.

“You still have 100 (billion cubic feet) in Asia which needs to be contracted in order to meet the demand” by 2030, Vivier said. “This cannot come only from the U.S.”

Producers will look to Africa, Australia and elsewhere for new supplies, he said, and they will need to lock in long-term contracts to justify those projects. Those contracts will be oil-indexed, he said.

The Henry Hub market is known for volatile spikes in response to seasonal weather-driven demand. Front-month futures prices on the New York Mercantile Exchange have moved 5% or more on 16 days so far this year alone.

For producers seeking decades of reliable income, Henry Hub “can definitely not be the sole exposure,” Mr. Vivier said.
Japan, the largest LNG importer, has announced plans to launch a futures market for LNG. But that market will need to be linked to storage or downstream trading to ensure it doesn’t disconnect from the physical market, said Stephane Chaudron, head of LNG at commodity trading giant Gunvor Group. “If it works, we would very much like to trade with it,” he said.